Filing taxes for the first time
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Taxes in the U.S. have a reputation for being intimidating and complicated. If it’s your first time filing taxes, you might feel unsure about what exactly to do, or nervous about getting something wrong. Where do you file taxes? How do you file? What documents do you need? Should you get professional tax help? Does the process change if you had a side gig? 

Don’t worry. For most people who are filing taxes for the first time the process should be relatively simple. You’ll probably only have a few documents to worry about and you might even be able to file for free with software that walks you through the process. Let’s dive into what you need to know when filing taxes for the first time!

Who Has to File Taxes?

First things first: do you even have to file? Or are you going to bookmark this article and check back next year?

You can use the IRS’s “Do I Need to File?” quiz to get a specific answer based on your situation. In general, you don’t have to file if you earned less than the amount of your standard deduction. That amount changes based on your age (under vs. over 65), filing status (single/joint/etc.), and the year.

👉 As an example, the 2020 standard deduction for a single filer under 65 is $12,400, so you may not have to file if you made less than that.

However, this rule changes if you have special circumstances requiring you to file. For instance, if you have a business or are self-employed, you’re required to file if your net self-employment income was at least $400.

So the short answer is, you usually have to file if you made more than your standard deduction amount from any source, or more than $400 from self-employed work.

Common Sources of Taxable Income & Tax Forms

If you’re a first-time tax filer, chances are you don’t have a billion different sources of income yet. That’s good; it keeps things simple! You can view the IRS’s full list of income types here, but for now, we’re just going to hit the most common ones. 

Wages and Salaries 

If you’re a traditional employee who receives a paycheck from an employer, that income counts as wages or salaries. Your employer will withhold a portion of your paycheck for taxes throughout the year and will issue you a W-2 form at tax time. 

Business/Self-Employment Income 

Do you do any kind of work for yourself or as a side hustle? This could include freelancing for clients online, running a summer business mowing lawns around your neighborhood, delivering food or groceries through an app, etc. This is self-employment or business income. You’ll report this income on a Schedule C form along with your Form 1040.

If you did over $600 of work for one client, they’re responsible for issuing you a 1099 form. If you did under $600 of work per client or don’t receive a form, you’re responsible for tracking and reporting this as miscellaneous income.

Interest Income 

Did you save some of your money in a bank account that pays interest? Awesome; you’re building your net worth and making free money! But this qualifies as income too. If you made more than $10 in interest, your bank will send you a 1099-INT form.

Investment-Related Income 

If you’re dabbling in the stock market, you might have made money in a few different ways. Dividend income will be shown on a 1099-DIV form, which you’ll get from your broker. If you bought a share and sold it at a profit, the profit will be subject to capital gains tax; your brokerage will send you this information on a 1099-B form

👉 For instance: If you bought a stock for $5 and sold it for $15, you’ll be taxed on the $10 you gained.

Note that stock-related taxes only apply if you’re trading in a taxable account. You don’t have to worry about reporting dividends received or trades made within tax-sheltered accounts like an IRA or 401k.

How to File Taxes

Now that you know what kinds of income you might be earning and what forms you might expect, let’s look at the steps to filing your own taxes for the first time.

1. Understand Your Sources of Income

In order to know what to expect, you’ll want to keep records of any finance-related activities you’re doing throughout the year. Were you an employee at multiple companies? Expect multiple W-2s. Do you have multiple bank accounts? You’ll probably get an interest form from each one. Are you a freelancer working for a variety of clients? Keep records of your income from all of them.

☝️ If you’re being paid through PayPal, TransferWise, or similar services, you can usually download a transaction record that will include your work payments.

2. Know Your Dependent Status

If you’re filing taxes for the first time because you’ve recently become an adult, you may be used to your parents handling everything and claiming you as a dependent. 

Before you file taxes on your own, check in with your parents to make sure they don’t plan to claim you as a dependent this year. Your social security number cannot be used twice, so if they claim you, it will cause problems when you try to file. (Or, if you file first, it’ll cause problems when they try to claim you.) 

Review the IRS’s rules for qualifying dependents to figure out whether you could be considered a dependent or have any dependents yourself (e.g. if you’re a new parent or you support an elderly relative).

3. Gather the Necessary Documents 

Most tax forms come by mail throughout the month of January. Pick a designated place (e.g. a desk drawer) to set aside any forms you receive, so you don’t have to hunt through stacks of mail when you’re ready to file. 

You’ll probably have some combination of W-2s and 1099s. There might be some other forms in there too, depending on your situation—for instance, you might get a form to deduct student loan interest, tuition expenses, or mortgage interest. If you aren’t sure what a form is, check the IRS website for guidance.

You also need basic identifying information like the social security or tax ID numbers of everyone included on your tax return.

4. Review Your Deduction and Tax Credit Options

All filers can choose whether to take the standard deduction (a set amount of $12,400/person in 2021) or to itemize deductions. Itemizing is a lot more work, as it means you need to list out all your qualifying tax-deductible expenses like certain medical and dental costs, charitable contributions, or state and local taxes. 

As a first-time filer, you’ll probably be better off choosing the standard deduction. If you didn’t spend more than $12,400 on qualifying expenses like the ones above, it isn’t worth it to itemize.

Even if you take the standard deduction, there are some “above-the-line” deductions you can take to reduce your tax bill. These include traditional retirement plan contributions, health insurance premiums, contributions to a Health Savings Account, and more.

You can also review the IRS’s list of tax credits here, which are even more powerful than deductions if you’re eligible for any.

5. Consider Business Expenses

If you had any business or self-employment income, you can deduct any relevant business expenses from your business income. For instance, if you bought a lawnmower to run that summer lawn-mowing business, that’s a business expense. Or if you freelance using the internet, you can claim a portion of your internet costs as a business expense.

6. Plug In Your Numbers

All that’s really left to do is take the information from your forms and records and transfer it all to the Form 1040 that you’ll ultimately submit to the IRS. Next, we’ll quickly cover some different methods of accomplishing this! 

Different Methods of Filing Taxes

Time to talk logistics: what method will you choose to file your taxes for the first time?

Filing Taxes Online or With Software

Using a tax website or software to file your taxes is undoubtedly the easiest way to get it done. Usually, these programs will prompt you with easy-to-understand questions that guide you through the process. The software might ask “Did you receive a W-2 form?” If you did, all you have to do is type in the information on the W-2. They’re designed to be intuitive, making them perfect for first-time tax filers.

If you earned under $72,000 in 2020, you’re eligible to use the IRS Free File Program to file your taxes online through an IRS partner website for free. 

If you earned over $72,000, you’ll need to pay to use tax software. Popular options include TurboTax, H&R Block, TaxAct, and others.

Doing Your Taxes on Paper

Want to try your hand at doing it the old-school way? In my opinion, paper taxes are taxes on “hard mode”, but it’s still a valid option. 

There are a couple different ways to get paper tax forms:

  1. Download Form 1040 and any relevant schedules from IRS.gov and print them
  2. See if your local library or post office offers free paper tax forms.

IRS.gov also has a Forms & Instructions page where you can access detailed instructions about how to fill out your tax forms.

Using Professional Assistance

If the idea of taxes is still making you sweat, there’s no shame in calling in the pros. You can use the service of a qualified tax preparer to file your return. You’ll provide them with all your relevant documents and details, then let them take care of filling in forms and looking for deductions. However, these services cost money, so unless your taxes are quite complex I’d encourage taking a crack at it yourself first! It’s always a good idea to understand what’s going on with your finances, and most first-time filers will be facing relatively simple situations.

Once you’ve filed your taxes a few times, you’ll be breezing through 1040s in your sleep. Well, okay, you probably don’t want to dream about taxes. Totally fair… but also a good reason to get them off your mind! File now and you won’t have to worry about taxes until next year.

If you have questions about filing taxes for the first time, let us know in the comments below!